Interchange Fees: GAO Recommends Caution on Regulation

Lowering interchange fees does not necessarily help consumers.


The Government Accountability Office just issued a report on the issue of rising interchange fees for merchants who offer credit card services. As I wrote in a previous article, merchant groups have got the ears of certain members of Congress, and regulation is on the table that would theoretically lead to lower interchange fees for merchants and lower prices for consumers.

But, as I explained, the issue isn't that simple. There are several myths that both sides (merchants on one side, credit card issuers on the other) are bandying about to make their individual stance look like the unalloyed good.

The GAO report serves to show how complicated interchange regulation is. But it does provide some notes of caution that Congress should heed before it acts.

1. The GAO basically agrees with my suggestion that it's impossible to determine if a lower interchange fee would be passed onto consumers.

2. In the U.S., small credit unions are concerned that limitations on interchange fees will reduce their ability to extend credit to customers. The GAO consults the example of Australia (which implemented interchange regulation) to see what would happen here:

Australian officials reported that since their reforms were instituted, the number of credit card accounts in Australia has continued to increase and smaller credit unions have remained in the credit card business, albeit with some of their operations outsourced.

This doesn't shed much light on the subject. So credit card accounts increased, but would they have increased more without regulation? Smaller credit unions "remained" in the business, but was it to a lesser extent than they otherwise would have?

3. The GAO report makes clear that most merchants in the U.S. want a cap on interchange fees. But as I reported, there is a less aggressive regulatory approach: Allow merchants to negotiate with credit card issuers, and add surcharges on certain cards if need be. But besides the obvious problem consumers would have with new charges being slapped onto their cards, the GAO mentions bigger practical problems with that approach:

Finally, the proposal to allow merchants to directly negotiate with issuers raised several issues from the industry participants we interviewed. They said that such negotiations could harm small merchants and small issuers, which do not have as much leverage as larger participants and, in some cases, lack the resources to participate in bargaining sessions. In addition, prudent exercise of this option would require an exemption from federal antitrust laws, which include provisions designed to protect consumers from the consequences of agreements in restraint of trade. DOJ officials have expressed their historical opposition to efforts to create exemptions to antitrust laws, stating that these exemptions should be used only in the rare instances in which a public policy objective compellingly outweighed free market values.